Investors shunned shares in electric vehicle startups last month, and Lucid Group (NASDAQ:LCID) was, of course, no exception. The overall shift in sentiment about the EV sector, coupled with a poorly received quarterly earnings report, resulted in a big drop for LCID stock.
This pullback carried over into March, but shares have been climbing higher in recent days. With this, is Lucid, initially regarded as a Tesla (NASDAQ:TSLA) competitor, but now viewed with a more skeptical eye, on track to make a comeback?
This is up for debate. Although there is still a path for this fledgling luxury EV maker to scale into a profitable enterprise, whether this will translate into a large, sustained move higher for LCID remains to be seen. A key factor behind the stock’s fall to the single-digits could keep it there for quite some time.
How Success Could Cease to be Elusive for Lucid
In recent articles on Lucid Group, I have been quite critical of the EV maker’s failure to live up to the past hype that once surrounded it. Instead of giving Tesla a run for its money, Lucid has instead underwhelmed investors, with lower-than-expected production figures, declining reservation numbers, and high cash burn that has required a dilutive capital raise.
However, while success has eluded the company thus far, that may not remain the case indefinitely. Although Lucid has its work cut out for it in capturing a U.S. luxury EV market share, it may capture market share in other regions. For instance, in the backyard of its majority owner, Saudi Arabia’s Public Investment Fund.
The oil-rich kingdom hasn’t only invested monetarily into LCID stock; the Saudi Government has provided billions in incentives so that the company can build a production facility there, one that could produce up to 155,000 vehicles annually.
Planning to kick off production later this year, Lucid has an existing pool of demand to sell into, with the Saudi Government committed to buying 50,000 vehicles, with an option to buy 50,000 more.
Why LCID Stock Could Still Stay in a Slump
Beyond Saudi Arabia, Lucid could end up selling many its vehicles in other affluent Gulf states, like the United Arab Emirates (UAE). Coupled with slight improvements to its U.S. operating performance, the company could ultimately become profitable.
But even if this EV maker finally “makes it,” that doesn’t mean that LCID stock will continue to recover. While a move out of the red may be attainable, heavy losses probably will continue in the meantime. LCID reported losses of $1.51 per share last year. Analyst forecasts suggest losses will narrow slightly this year and over the next two years.
These expected losses, along with added capital expenditures from its production ramp-up, point to a further depletion of the company’s already-dwindling cash position. After investing billions into Lucid, and banking on the company’s success helping to turn its country into a major EV hub, Saudi Arabia will probably be willing to provide additional infusions.
However, this would cause heavy shareholder dilution. The dilution from the aforementioned capital was a factor in pushing shares to the single digits. Dilution from additional capital raises could keep it there.
Success in the Middle East or not, don’t count on Lucid ever living up to its initial vehicle sales goals. The company may become a profitable, niche purveyor of luxury EVs.
This may enable this enterprise to one day become worth far more than LCID’s current market cap ($14.3 billion). Yet if getting to profitability requires the company to sell additional shares, the stock’s ultimate per-share value may not be that far above current prices.
Also, Lucid’s Saudi backing doesn’t guarantee profitability. Much like in other markets, competition from Tesla and incumbent luxury automakers may limit its potential in the Middle East as well.
Instead of merely held down by additional dilution, subsequent capital raises could sink shares to new lows.
Downside risk remains high. Upside is likely limited. All in all, LCID stock is not a compelling rebound play.
On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.